Financial

Europe could have dealt with Cyprus cheaply and painlessly with a pan-European body able to recapitalize the country’s banks. Next could be Malta and Slovenia where the government is already making contingency plans for coping with bank losses…

 


Powered by Guardian.co.ukThis article titled “Eurozone crisis demands one banking policy, one fiscal policy – and one voice” was written by Larry Elliott, economics editor, for The Guardian on Monday 1st April 2013 13.24 UTC

It had all started to look quite promising. The US was picking up, China had avoided a hard landing and in Japan the early signs from the new government's anti-deflation approach were encouraging. Even in Britain, the first couple of months of 2013 provided some tentative hope – from the housing market and consumer spending, mainly – that the economy might escape another year of stagnation.

Then Cyprus came along. The last two weeks of March brought the crisis in the eurozone back into the spotlight, and by the end of the month the story was no longer rising share prices on Wall Street on the back of strong corporate profitability or the better prospects for Japanese growth. It was, simply, which country in the eurozone would be the next to require a bailout.

The past few days has seen what Nick Parsons, head of strategy at National Australia Bank, has called the "reverse Spartacus" effect after the scene at the end of Stanley Kubrick's epic in which captured slaves are offered clemency if they identify the rebel leader. All refuse.

In the aftermath of Cyprus, it has been a case of "I'm not Spartacus". Four members of the eurozone felt the need to issue statements explaining why they were different from the troubled island in the eastern Med. We now know that Portugal is not Spartacus, Greece is not Spartacus, Malta is not Spartacus and Luxembourg, which has the highest ratio of bank deposits to GDP in the eurozone, is not Spartacus. As Parsons noted wryly, Italy was unable to say it was not Spartacus because it still doesn't have a government to speak on its behalf. Otherwise it would probably have done so.

Few of the independent voices in the financial markets take such attempts at reassurance seriously. Another crisis in the eurozone could be avoided, but only if those in charge (sic) act more speedily and effectively than they have in the past. As things stand, another outbreak of trouble looks inevitable.

Cyprus has enough money to get by for a couple of months, but by then will be feeling the impact of a slow-motion bank run as depositors remove their money at the rate of €300 (£250) a day. The economy has been crippled by the terms of the bailout, a Carthaginian peace if ever there was one, and the country's debt ratio is bound to explode.

Investors are already casting a wary eye over Malta, which appears to have been the short-term beneficiary of capital flight from Cyprus, but the bookies favourite for the next country to need a bailout is Slovenia, where the government is already making contingency plans for coping with bank losses.

By focusing on the eurozone's minnows, the markets are in danger of overlooking a much bigger potential problem. If attempts to put together a new government in Rome fail, Italy will be facing a second general election and in such a scenario opinion polls currently put Silvio Berlusconi ahead.

It is not hard to sketch out a sequence of events in which Berlusconi completes a political comeback, the markets take fright, Italian bond yields go through the roof, the European Central Bank (ECB) under Mario Draghi says it will only buy Italian debt if Berlusconi agrees to a package of austerity and structural reforms, the new government refuses and then calls a referendum on Italy's membership of the single currency. Italy has already had six consecutive quarters of falling GDP and is on course for a seventh, making the recession the longest since modern records began in 1960. So when Berlusconi says he cannot let the country fall into a "recessive spiral without end", he strikes a chord.

If policymakers are alive to the threat posed by one of the six founder members of the European Economic Community back in 1957, they have yet to show it. The assumptions seem to be that Cyprus is exceptional, that the ECB will ride to the rescue if it proves not to be, and that Europe will be dragged out of the danger zone by the pick-up in the rest of the global economy.

This is the height of foolishness. The factors causing the crisis in Cyprus are replicated in many other member states. The ECB's "big bazooka" – buying the bonds of struggling governments without limit – has yet to be tested, and because Europe is the world's biggest market, the likelihood is that the re-emergence of the sovereign debt crisis will seriously impair growth prospects in North America and Asia.

Economists at Fathom Consulting draw a comparison between the eurozone today and the UK at the very start of the financial crisis. Mistakes were made with the handling of Northern Rock because of fears that a bailout would create problems of moral hazard – in other words helping a bank that had got itself into trouble through its own stupidity would encourage bad behaviour by others. The systemic risks were not recognised, with disastrous consequences.

Similarly, the eurozone has not understood the systemic potential of the current crisis, Fathom argues, not least the "doom loop" between fragile banks and indebted governments. Austerity is making matters worse because cuts to public spending and higher taxes hit economic activity by more than they reduce government deficits. Public debt as a share of national incomes goes up, not down.

Austerity can work, but conditions have to be right for it. It helps if a country's trading partners are growing robustly, because then the squeeze on domestic demand can be offset by rising exports. It helps if the central bank can compensate for tighter fiscal policy by easing monetary policy, either through lower interest rates or through unconventional measures such as quantitative easing (QE). And it helps if the exchange rate can fall. Not one of these conditions applies in the eurozone, which is why the fiscal multipliers – the impact of tax and spending policies on growth – are so high. Put bluntly, removing one euro of demand through austerity leads to the loss of more than one euro in GDP.

So what should be done? Clearly, the self-defeating nature of current policy needs to be recognised. Countries need to be given more time to put their public finances in order. The emphasis should be shifted from headline budget deficits to structural deficits so that some account is taken of the state of the economic cycle, and the ECB needs to be ready with its own version of QE.

Simultaneously, work needs to speed up on creating a banking and fiscal union. Europe could have dealt with Cyprus cheaply and painlessly had there been a pan-European body capable of recapitalising the country's banks. Delay in setting up such a body threatens to be costly.

Finally, the eurozone needs to start talking with one voice. A bit of "I'm Spartacus" would not go amiss.

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USA 

Global stock markets and euro rise after ECB president Mario Draghi’s ambitious plan to keep the eurozone together. U.S. unemployment rate declines but job creation disappoints, raising the odds of additional easing by the Fed…



Powered by Guardian.co.ukThis article titled “Draghi’s eurozone rescue plan continues to boost shares and euro” was written by Julia Kollewe and Graeme Wearden, for The Guardian on Friday 7th September 2012 17.22 UTC

European Central Bank president Mario Draghi’s rescue plan for the eurozone brought cheer to financial markets for a second day, while pressure built on Portugal, which was expected to announce further austerity measures.

The Italian stock market added 2.1%, while the Dax closed up 0.7% and Spain’s Ibex, France’s CAC and the FTSE 100 in London all finished the day 0.3% higher after “Super Mario’s” ambitious plan announced on Thursday to keep the eurozone together by sanctioning “unlimited” bond buying by the ECB.

Asian markets also staged a strong rally, with Japan’s Nikkei index posting its biggest gain in five months, of 2.2%.

The euro rose against the dollar, climbing near the $1.28 level for the first time in three months.

Spanish and Italian borrowing costs declined sharply, with the yield, or effective interest rate, on Spanish 10-year debt dropping 0.4 percentage points to 5.6% – the first time it has been below 6% since May. Six weeks ago it had surged to 7.6%, deep in the danger zone where borrowing costs become unsustainable, and at the start of this week it was still around 7%. The Italian equivalent fell a quarter of a point to 5% – in late July before Draghi’s commitment to “do whatever it takes” to preserve the euro it was at 6.75%. The cost of insuring Spanish debt also tumbled.

The 10-year Portuguese yield was down 0.4 points to its lowest level since March 2011. Although as high as 8.1%, that compared with 18% in February.

The Dow Jones industrial average hovered between gain and loss after the US Labour Department said the US had added just 96,000 new jobs in August, far below expectations. The Dow hit its highest level since December 2007 on Thursday, but the jobs report focused investors on the US’s own problems.

The pound got a fillip from the weak US jobs data, climbing to above $1.6 for the first time since mid-May. Surprisingly strong industrial production data also brought some cheer to Britain. Factory production in Germany was also stronger than expected, rising by 1.3% in July.

The Federal Reserve meets next week and economists speculated that the poor jobs figures will add further pressure on the central bank to act. Chairman Ben Bernanke indicated in a speech last week that he was concerned about the slowing pace of the US recovery and the still high unemployment rate.

The Portuguese prime minister, Pedro Passos Coelho, was expected to set out fresh austerity measures last night in a televised address billed as a “declaration to the country”. Measures such as a VAT rise, cuts to the public sector payroll, or new tax measures were expected.

Spain gave no hints on when it might make a formal bailout request to trigger the bond-buying programme. Deputy prime minister Soraya Sáenz de Santamaría said the plan would be discussed at next week’s meeting of European finance and economy ministers in Cyprus.

“While markets are currently happy that the ECB’s bond purchase scheme stands ready to be activated, getting the Spanish and Italian governments to agree to programmes is likely to be fraught with difficulties,” said Grant Lewis at Daiwa Capital Markets. “Indeed, the positive market reaction makes their activation less likely by taking the pressure off the Spanish and Italian governments. So, it may well require a significant deterioration in market sentiment once again to ultimately trigger the programmes that lead to ECB purchases.”

German chancellor Angela Merkel expressed support for the ECB over the creation of the bond-buying programme, and said the central bank was right to insist on conditions in return for any assistance provided through the scheme. Meanwhile, the Bundesbank, Germany’s central bank, refused to back the plan, and it did not go down well in parts of the German media. Top-selling tabloid Bild led the way, warning that the ECB’s “blank cheque” could make the euro “kaputt”.

Handelsblatt criticised “the democratic deficit of the euro rescuers” and linked the ECB’s latest action to next Wednesday’s ruling by Germany’s Constitutional Court on the legality of the eurozone’s new bailout mechanism and budget rules. This is another crunch day in the euro – a rejection of the European Stability Mechanism and the fiscal pact would plunge the eurozone into fresh turmoil. A Reuters poll of 20 top lawyers found unanimous agreement that the court will throw out the request for a temporary injunction to halt the ESM and the pact. However, 12 of those questioned also expect the court to insist that German liability has to be limited.

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European Central Bank president Mario Draghi announced the details of a bond-buying program to bring down borrowing costs. Here is a list of 10 essential terms that traders need to know before the ECB plan is activated…



Powered by Guardian.co.ukThis article titled “ECB bond-buying: 10 essential terms” was written by Josephine Moulds, for guardian.co.uk on Thursday 6th September 2012 11.45 UTC

European Central Bank president Mario Draghi is expected to announce the details of a bond-buying programme to help keep down borrowing costs of crisis-hit countries later on Thursday. Leaks suggest it will involve unlimited purchases of government debt that will be “sterilised” to assuage concerns about printing money.

The bond-buying scheme is rumoured to be called the “outright monetary transactions”, with a shorthand title of OMT.

Maturity

The life of a bond, at the end of which it will be repaid in full. A bond’s maturity can be as short as a year to as long as 100 years.

Seniority

This refers to how likely you are to be repaid if a bond issuer goes bankrupt. Bondholders with seniority over others will be paid back before other bondholders. There was some concern that the ECB would demand seniority over other bondholders when it undertook the bond-buying scheme, but leaks now suggest otherwise.

Unanimity

Was the ECB governing council united in backing Thursday’s decision, or was there opposition? Bundesbank head Jens Weidmann has spoken out against a bond-buying programme before – is he now onside? Was the ECB split over interest rate levels, or were the decisions unanimous? Draghi’s answer to these questions (which will surely come up) could be crucial.

Pari passu

A Latin phrase meaning “equal footing”. In the bond markets, this means bondholders will be treated the same if a bond issuer goes bankrupt. Any purchases the ECB makes as part of its bond-buying programme are expected to be pari passu with other bondholders.

Collateral requirements

The ECB asks banks for collateral in return for taking out cheap loans. If they relax collateral requirements, they can accept a wider range of assets as collateral from banks. They have already relaxed these requirements, and can now accept everything from bundles of car loans to mortgage-backed securities.

Conditionality

This is the way the ECB would keep the Germans happy, by imposing conditions on receiving assistance from the ECB; so, if the ECB helps keep a country’s borrowing costs low by buying up its bonds, that country may have to agree to some strict austerity. Without conditionality it would be easier for the ECB to unilaterally intervene.

Convertibility risk

This refers to the risk that you will buy bonds denominated in euros but could ultimately be paid back in lire or drachma (or deutschmarks) if the country taking out the debt leaves the eurozone before the end of the bond’s life.

Unlimited intervention

Exactly what it says on the tin. Expectations are that the ECB will not put a limit on its bond buying. This is seen to be an improvement on the previous bond-buying programme, which was limited in size and therefore lacked credibility in the markets. If other traders do not believe the ECB has the firepower (or inclination) to buy enough bonds to bring down yields, they may continue to bet on them rising.

Sterilisation

This makes sure the money supply does not increase as a result of the bond-buying programme. When the ECB buys bonds, it is injecting liquidity into the financial system, effectively creating new money. To counteract that, the ECB has in the past followed bond purchases by subsequently draining an equal amount of liquidity from the system. It does this at the weekly deposit tender by increasing the rates it will pay commercial banks to deposit money with the ECB. The idea is that this will encourage banks to deposit more money with the ECB, thereby taking it out of the system.

Yield cap

Rumour had it that the ECB would set a yield cap on certain countries’ government bonds. This would mean if the yield looked like it would break through that level, the ECB would start buying bonds to push prices higher and bring yields back down.

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Mario Draghi expected to announce plan to buy unlimited quantities of government debt from troubled eurozone members. German Chancellor Angela Merkel tells lawmakers she opposes unlimited European Central Bank bond purchases…



Powered by Guardian.co.ukThis article titled “Euro rises on report of ECB plan to buy unlimited debt” was written by Larry Elliott, economics editor, for guardian.co.uk on Wednesday 5th September 2012 14.19 UTC

The euro rose on the foreign exchanges on Wednesday after the Bloomberg financial news service reported that the European Central Bank was preparing to announce plans to buy unlimited quantities of government debt from troubled members of the single currency.

Quoting central bank officials, the agency said the ECB was ready to take action to bring down the interest rates on borrowing paid by countries such as Italy and Spain. Full details of the blueprint are likely to be disclosed by Mario Draghi, the ECB president, on Thursday after a meeting of the central bank’s governing council.

According to the Bloomberg, the ECB plans to “sterilise” its bond-buying by removing money from elsewhere in the eurozone economy such as by selling bonds or restricting the money supply. This could ease fears that action to help the weaker members of the 17-nation bloc will lead to an explosion in the money supply.

The ECB is likely to concentrate on buying short-term debt – bonds that mature within three years – in the hope that it will provide breathing space until longer-term measures are in place.

Germany has been critical of Draghi’s plan to “do whatever it takes” to prevent a breakup of the single currency, but Bloomberg said the ECB expected the proposals to be adopted despite the misgivings of Angela Merkel and the president of the Bundesbank, Jens Weidmann.

Some analysts have been expecting Draghi to set a target level for bond yields of eurozone countries, but this is not thought to form part of the proposal.

The euro rose by half a cent after the apparent leak of the Draghi plan, although some analysts remained cautious. “I think the market saw the word ‘unlimited’ and jumped before realising that the ECB would not expand its balance sheet as it would sterilise all its purchases and thus this was not the kind of aggressive monetary expansion that FX traders were looking for,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

“Net takeaway is that if this is sterilised it will probably not be enough to keep the bond vigilantes at bay. Furthermore, the backing away from any specific yield targets is exactly the lack of clarity that the FX market will not like.”

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Ben Bernanke describes US economy as ‘far from satisfactory’ and shares concern over unemployment and growth. The Fed Chairman keeps the door open to another, third round of quantitative easing should the economy worsen…



Powered by Guardian.co.ukThis article titled “Markets pick up as Fed chairman signals possibility of third round of QE” was written by Dominic Rushe in New York and Phillip Inman, for The Guardian on Friday 31st August 2012 21.56 UTC

US central bank chief Ben Bernanke sparked a surge in share values on Friday after he signalled his willingness to embark on a third phase of money creation to boost the US economy.

The Dow Jones industrial average closed the day with a gain of 90 points after the chairman of the Federal Reserve gave a robust defence of past central bank interventions, which, traders said, prepared the ground for a third round of quantitative easing should the economic picture worsen. France’s CAC and the German DAX closed up 1%.

In his much anticipated a speech in Jackson Hole, Wyoming, Bernanke described the current economic situation as “far from satisfactory”. He said that high rates of unemployment were a “grave concern, not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for years”.

His speech to the annual central bank symposium came ahead of September’s meeting of the Federal Reserve’s open markets committee (FOMC), which sets US economic policy. Recently released minutes from its last meeting show the committee has become increasingly concerned about the US recovery and is weighing further action.

However, since the last FOMC meeting, more positive economic news has emerged on jobs and housing. Next week the closely watched non-farm payroll survey of monthly employment trends will be released. After a sharp rise over the winter, job growth slowed in the spring, but appears to be picking up again.

He urged European leaders to make faster progress in tackling the debt crisis affecting Greece and other indebted eurozone countries. His concerns that Europe may drag the US back into recession were highlighted by figures showing that unemployment across the zone remained at an all-time high in July.

The European Union’s statistical agency, Eurostat, said 88,000 more people were without a job in July, pushing the total out of work in the eurozone to 18m, the highest level since monetary union in 1999.

The 11.3% unemployment rate, up 1.2 points from a year earlier, failed to come down after joblessness increased in Spain and bailed-out Greece. In Spain youth unemployment stood at 52.9%, in Greece at 53.8%.

Any monetary action by the Fed is likely to trigger a furious response from elements within the Republican party who have criticised his past actions and warned against new measures.

Mitt Romney, the Republican presidential candidate, has made it clear he will replace the Fed chief, who he accuses of putting taxpayers’ cash at risk, if he is elected in November.

The House financial services committee chairman, Spencer Bachus, told Bernanke last month at a congressional hearing: “The truth is the Federal Reserve cannot rescue Americans from the consequences of failed economic and regulatory policies passed by Congress and signed by the president.”

The initial US quantitative easing programme from November 2008 to May 2010 saw the Fed buy $1.75tn in debt held by mortgage providers Fannie Mae and Freddie Mac, a range of mortgage-backed securities and government bonds, mostly from the country’s 3,000 banks.

A second round, dubbed QE2, involved an additional $600bn. “Operation Twist” began in September 2011 with a pledge to swap $400bn in short-term loans for longer term bonds, with an extension in June adding a further $267bn.

Bernanke offered a strong defence of his actions at Jackson Hole. “A balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks,” he said.

In a swipe at Republican critics who accuse him of jeopardising hundreds of billions of taxpayer funds following the expansion of Federal Reserve loans, he said loans by the Fed since the bank rescues of 2008 had earned money for the exchequer.

David Zervos, head of global fixed income strategy at US investment bank Jefferies, said it was unlikely the Fed would back a further round of central bank lending before the presidential election in November.

“The idea that the Fed would come out with unconventional monetary policy, such as credit easing of some kind, seems to be a little bit of a stretch,” he said.

“This was a backstop speech that gets Bernanke through. If the data turns or Europe turns, then the Fed is back in.”

Gus Faucher, senior economist at PNC Financial Services, said: “It sure sounds to me like he is getting ready to act.”

He said the FOMC would now be waiting for the non-farm payroll figures. In July, the US added 163,000 new jobs, more than many economists had expected. Faucher is predicting that 130,000 new jobs were added in August, while other analysts are expecting about 100,000.

“If it comes in below 100,000, I think the Fed will act,” he said. “That would be four out of five months below 100,000. That’s not good enough.”

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Leaders in Brussels divided over how to interpret summit accord aimed at easing pressure on highly indebted states, Spanish banking rescue was the main issue confronting ministers on Monday, but there were mixed signals over who would be liable…



Powered by Guardian.co.ukThis article titled “Eurozone talks stuck on detail of bank rescue fund plan” was written by Ian Traynor in Brussels, for The Guardian on Monday 9th July 2012 18.10 UTC

Eurozone leaders are meeting in Brussels to try to build on a “breakthrough” summit 10 days ago that agreed to ease the pressure on highly indebted states by injecting rescue funds directly into troubled banks.

But the meeting has been plagued by divisions over how to interpret the summit accord and how the decisions should be implemented.

The Spanish banking rescue was the main issue confronting ministers on Monday, but there were mixed signals over who would be liable for the mooted direct recapitalisation of the country’s financial sector.

The summit resolved to break the invidious link between failing banks and weak sovereigns by agreeing to use eurozone bailout funds to recapitalise banks directly, not via governments, to avoid pushing up debt levels. But since the summit, eurozone creditor governments have backtracked on the pledges over how the accord will be implemented.

While the Germans and other north Europeans insist that direct bank injections can be contemplated only once a new regime of banking supervision is in place (likely to take a year), senior Eurogroup officials signalled that even in the event of bailout funds going straight to banks, the host country would still be burdened. If the main bailout fund, the European Stability Mechanism, took equity in troubled banks, the host government would need to underwrite the risk and be liable if the bank went bust, the officials said.

“The ESM is able to take an equity share in a bank, but only against full sovereign guarantees. It remains the risk of the sovereign. There’s some degree of mystification going on here,” said a senior official.

That was contradicted by the European commission, which stressed there would be no liability for the host state if its banks were rescued.

With the troika of the commission, the European Central Bank and the International Monetary Fund scrutinising the performance of Greece, Cyprus and Spain, the senior official added that it would be the end of August before any decisions were taken on Greece and Cyprus.

Spain was expected to dominate Monday night’s session, the quandary made more urgent as the yield on Madrid’s benchmark 10-year bonds nudged 7.2%, past the point of the affordable.

The ministers were to try to reach a “political understanding” on a memorandum between the eurozone and Madrid to be finalised later this month. In Brussels there is talk of emergency Eurogroup talks around 20 July or an extraordinary summit. Ministers could also confer by videoconference before the August holiday.

In what appeared to be a reference to Spain, Draghi said last week that bailout funds to banks would burden the host country only temporarily since the money would come off the books once the new banking supervisory regime was in place. Eurogroup officials, however, cast doubt on whether Spain would benefit, pointing out that the memorandum of understanding with Madrid was likely to extend only until 2014 and it could take that long for the new procedures to be implemented.

On Greece, the officials said “there would be no more disbursement” of eurozone bailout funds until the current troika mission was complete and had assessed how far Athens’ austerity and structural reform programmes had been blown off track by the political turbulence of the last three months.

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The Fed announced that it will extend Operation Twist. The US central bank intervention is expected to prompt action by central banks across the world amid fears the eurozone crisis is deepening…



Powered by Guardian.co.ukThis article titled “Federal Reserve extends Operation Twist and more QE expected in UK” was written by Phillip Inman economics correspondent, for The Guardian on Wednesday 20th June 2012 19.53 UTC

US central bank chairman Ben Bernanke has sought to offset a slump in global growth with an extension of Operation Twist, the 7bn (£176bn) Federal Reserve scheme to reduce long-term interest rates in the US.

His intervention came after Bank of England minutes revealed that governor Sir Mervyn King was narrowly outvoted over pumping more money into the UK economy at the June meeting – making it almost certain that the Bank will increase its £325bn quantitative easing (QE) programme next month.

The Fed downgraded its US growth forecasts for 2012 to 1.9%-2.4%, from the 2.4%-2.9% predicted in April, as Bernanke and the Federal Open Markets Committee agreed to extend Operation Twist to boost confidence amid falling consumer demand and a drop in output growth over recent months.

The intervention is expected to trigger a wave of activity by central banks across the world following fears that the euro crisis and severe austerity measures across the developed world have extinguished signs of recovery in China and many developing countries.

Central bank officials said they were especially nervous following the deterioration in the Spanish economy and heightened fears of a sovereign default in the eurozone.

EU officials said they were working on plans to protect ailing countries from collapse and a Spanish minister said support for a euro-wide policy of bond purchases by the EU's main rescue fund was gaining support.

But German Chancellor Angela Merkel refused to offer her backing, saying Greece must uphold its side of the bargain.

"It's obvious that the reforms that were agreed in the past are the right steps and that they therefore must be implemented."

Merkel, who invited the new prime minister of Greece, Antonis Samaras, to Berlin for talks, has consistently voiced her opposition to indebted countries winning easier terms without more stringent economic reforms.

European commission spokesman Amadeu Altafaj Tardio said any bond buying plan could only be a stopgap.

"If I could put this into everyday language, we're talking here about financial paracetamols," he said. "It may alleviate the tension, the pain … but it does not address the causes."

The Federal Reserve highlighted the euro crisis as a chief concern in its statement on the US economy.

The committee said it "anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook."

The Fed said it expected to keep interest rates exceptionally low at least until late in 2014.

Operation Twist involves the Fed selling medium-term bonds, and using the proceeds to buy longer-term bonds – such as 10-year Treasuries. In theory, such a move drives down the interest rate on 10-year bonds, taking down interest rates across the board. Mortgages are tied to 10-year Treasury rate and the move should bring down home loan rates.

Analysts said the Bank of England was poised to increase QE next month after its nine strong monetary policy committee (MPC) voted five to four against an increase this month, according to Bank minutes released on Wednesday, but highlighted the need for extra support in the coming months to prevent the UK's recession worsening. King was one of three committee members to vote for an extra £50bn and a fourth said he wanted a more modest £25bn injection of funds against five members who voted to maintain QE at its current level.

The narrowness of the decision will heighten expectations of a further boost to QE in July after another set of lacklustre economic figures, including a rise in jobless claims last month.

The governor was joined by Adam Posen and David Miles, who have consistently argued for Threadneedle Street to support cash-strapped banks and combat deflationary pressures in the economy with a higher level of bond purchases.

A group of hawks led by deputy governors Paul Tucker and Charles Bean said that while the economy needed extra monetary support, a further round of bond purchases could be swallowed by banks desperate to build up their reserves.

The minutes show the hawks expect the Financial Policy Committee, which oversees banking regulation, to support looser rules covering bank reserves to ease credit. The parlous state of the UK's bank finances remains much of the focus of the MPC, according to the minutes.

They said: "It was possible that the impaired UK banking system, coupled with a heightened perception of risk stemming from the euro area, had been a larger impediment to the recovery of both demand and potential supply capacity than previously thought likely: the weakness of lending, housing market transactions, business investment and productivity growth were all possible symptoms of that."

The committee agreed the downside risks to the economy appeared to have grown.

"The near-term outlook for UK activity had softened, and output appeared to be slowing in the euro area, United States and some emerging economies. Set against that, short and longer-term market interest rates had fallen on the month and this would provide some stimulus.

"More significantly, however, the risks to UK and global activity from financial distress and political tension within the euro area had intensified again. The likelihood of a disorderly outcome looked to have increased, and that could, if it crystallised, have a significant effect on global demand and the stability of the banking system, including in the United Kingdom."

• This article was amended on 21 June 2012. The original headline and opening paragraph incorrectly referred to an injection of 7bn into the US economy

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European Central Bank president Mario Draghi calls on Europe’s leaders to resolve situation as governing council rejects reducing rates or boosting liquidity…



Powered by Guardian.co.ukThis article titled “ECB dashes market hopes of fresh eurozone emergency measures” was written by Heather Stewart, for guardian.co.uk on Wednesday 6th June 2012 13.28 UTC

Mario Draghi, president of the European Central Bank, has dashed investors’ hopes of fresh emergency measures to contain the crisis in the euro area, leaving borrowing costs across the 17 member countries unchanged.

Explaining at his regular press conference in Frankfurt why the ECB’s governing council had decided against reducing rates from their current level of 1%, or unleashing a new wave of cut-price loans for struggling banks, Draghi suggested it was now up to Europe’s leaders to resolve the situation.

“Some of these problems in the euro area have nothing to do with monetary policy,” he said. “I don’t think it would be appropriate for monetary policy to fill other institutions’ lack of action.”

Stock markets on both sides of the Atlantic had bounced in anticipation of ECB action; but share prices began falling as Draghi spoke.

Draghi initially insisted the decision to leave rates on hold had been taken through “consensus”; but admitted in response to a later question that, “a few members would have preferred to have a rate cut today,” sparking hopes that the ECB could decide to reduce borrowing costs at its next meeting, in July.

He said the ECB’s Long Term Refinancing Operation (LTRO), which offered €1tn (£805bn) worth of three-year loans to banks in December and February, in exchange for collateral, had helped to resolve some of the tensions in financial markets, but the key problem now is no longer liquidity.

Summarising the ECB’s expectations for the next 12 months, Draghi said, “we continue to expect the euro area economy to recover gradually” – though he also admitted that “economic growth in the euro area remains weak, with heightened uncertainty weighing on confidence and sentiment”.

The ECB is forecasting growth across the euro area for this year to be between -0.5% and 0.3%; and for next year, between zero and 2%.

However, Draghi said this outlook was “subject to increased downside risks, relating in particular to a further increase in tensions in several euro area financial markets and the potential for spillover to the real euro area economy”.

Spain is currently the focus of financial markets’ anxiety, after Madrid admitted it does not have the resources to rescue its stricken banking sector without external help.

Asked whether the eurozone’s bailout fund, the EFSF, should be allowed to help Spanish banks directly – an idea the Germans have been reluctant to sanction – Draghi said: “Any decision about the EFSF should be based on realistic assessment of the need for recapitalisation of the banks and the money available to the government without the need to ask for external support.”

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Pressure on the ECB to ease increases as series of surveys show the eurozone economy shrinking and Spain admits for first time it needs help to recapitalize banks…

 


Powered by Guardian.co.ukThis article titled “ECB under growing pressure to stimulate eurozone economy” was written by Graeme Wearden and Ian Traynor, for The Guardian on Tuesday 5th June 2012 19.42 UTC

 

The European Central Bank will come under renewed pressure on Wednesday to take new steps to stimulate Europe’s flatlining economy as economic surveys show that the eurozone is shrinking.

On another tough day for the eurozone, data from Markit showed that the output of Europe’s private economy shrank at its fastest rate in nearly three years in May. Retail spending across the eurozone also fell much faster than forecast, with sales down by 1% in April compared with March, and 2.5% lower year-on-year. German industrial orders dropped by 1.9% in April, driven by a slump in overseas business.

The news came as Spain admitted for the first time that it needs outside help to recapitalise its banks, but continued to resist seeking a formal bailout.

Economists said the dire data indicated that eurozone GDP will fall by as much as 0.5% in the current quarter, after stagnating in the first three months of 2012.

“Companies report business activity to have been hit by heightened political and economic uncertainty, which has exacerbated already weak demand both in the euro area and further afield,” said Chris Williamson of Markit.

Spain and Italy, the two countries battling to retain the confidence of the financial markets, saw the largest drops in private sector output as their austerity programmes continued to bite.

Jeremy Cook, chief economist at World First, said: “PMIs this morning from Europe confirmed what has become very evident of late; that the situation in Europe will get a lot worse before it gets better.”

The bleak outlook in the eurozone will weigh on traders in London, as they return to their desks after the four-day break to mark the Queen’s diamond jubilee. All eyes will be on the City to see how shares respond. There was little prospect of a rally on Tuesday night with the futures market predicting a 18-point fall on the FTSE 100, partly due to a number of stocks going ‘ex-dividend’.

The ECB general council will announce its decision on monetary policy at lunchtime after its monthly meeting in Frankfurt. It will also release its latest economic projections for this year and 2013, which are likely to paint a more downbeat picture.

Despite the mounting evidence that the European economy is in trouble, a majority of economists believe the ECB will vote to leave interest rates unchanged at 1% this month. The ECB has repeatedly argued that national governments must make the fiscal reforms needed to calm the crisis. But rates are still expected to fall soon.

“We doubt that the ECB will cut interest rates as soon as their June policy meeting on Wednesday – although it is not inconceivable given the Eurozone’s heightened economic and sovereign debt problems – but we do now think it is highly likely that the ECB will cut interest rates to 0.75% in the third quarter,” said Howard Archer of IHS Global Insight.

Christine Lagarde, head of the International Monetary Fund, added to the pressure on the ECB by saying it has room to cut rates.

With Spanish bond yields close to the “danger zone”, and Italy not far behind, the ECB is also facing calls to start buying both country’s debt in the bond markets again.

European stock markets experienced a mixed day on Tuesday. France’s CAC index ended 1% higher, but Germany’s DAX closed down 8 points at 5969, and the main Athens index fell more than 5% to a fresh 22-year low.

European markets will remain highly nervous until the deadlock over Spain’s banking crisis is resolved. Madrid’s government continues to resist pressure to seek a bailout, but many analysts believe its resolve must crack.

Germany’s governing Christian Democrats, and the opposition Social Democrats, are both adamant that EU rules cannot be bent for Spain. Volker Kauder, the CDU’s parliamentary leader in Berlin, said financial aid for Spain must be requested by the government itself.

Frank-Walter Steinmeier, former German foreign minister and current SPD parliamentary leader, took a stronger line, saying there was a risk that Spain could run out of time. “I see a risk that Spain will be too late in deciding to seek protection from the euro rescue umbrella,” Steinmeier said.

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